The S&P 500 Hasn't Looked This Cheap Based on a Popular Metric in Decades. Should You Buy Stocks Now?
Stocks might not be as expensive as they first appear.
Overview
The S&P 500 (SNPINDEX: ^GSPC) might not seem cheap today. The benchmark index for large-cap stocks trades close to an all-time high. Many analysts have warned about concentration among big growth stocks, some of which have very high valuations relative to earnings. The Buffett indicator, which compares the combined market cap of all U.S. stocks to the U.S. gross domestic product, is off the charts. The CAPE ratio is at levels last seen at the height of the dot-com bubble. The list goes on.
However, stock prices are supposed to reflect the future earnings or cash flows of the companies behind them. In that regard, stocks look cheaper than they've been in at least 31 years. The S&P 500 price/earnings-to-growth (PEG) ratio, which compares the forward price-to-earnings (P/E) ratio to earnings growth expectations, sits around 0.7 as of this writing based on analysts' projections.
Details
In his book One Up On Wall Street, famed investor Peter Lynch said a PEG ratio below 1 indicates the market undervalues a stock. The S&P 500 PEG ratio has dipped below 1 just four other times since 1995. Today, it looks like the market is undervaluing the entire U.S. large-cap market by the widest margin ever. Does that mean investors should be buying as much stock as possible right now?
Source
Originally published at www.fool.com.